South Korean government holding firm on growth forecast as BOK cuts

[SEOUL] South Korea's Finance Ministry plans to stick with its growth forecast for this year, putting it at odds with the central bank on the outlook for Asia's fourth-largest economy.

The government stands by its December projection for gross domestic product to expand 3.8 per cent in 2015, Vice Finance Minister Joo Hyung Hwan said in an interview in Seoul. The differing views partly reflect a divergence of opinion on the likely impact of government policies, Joo said on Jan. 16, a day after the Bank of Korea cut its estimate to 3.4 per cent.

"There are certain differences in terms of how these variables will affect consumption, investment and exports," said Joo, 53, referring to support measures from the administration of President Park Geun Hye including fiscal stimulus and relaxed lending rules. The "basic tone" for the economy this year is improvement and recovery, he said.

Joo's upbeat stance points to the strongest economic performance in four years and contrasts with analysts from BNP Paribas SA and Nomura Holdings Inc., who expect expansion even lower than the BOK's new estimate. Risks to the government's forecast cited by Joo include the extent of probable interest rate increases in the US, further weakness in the Japanese yen and the slowdown in Europe.

The Korean won is trading around the highest level in more than six years against the yen, making it harder for exporters from Hyundai Motor Co. to Samsung Electronics Co. to compete.

The benchmark Kospi share index fell 4.8 per cent in 2014 and has declined 1.4 pe ent so far this year.

Expansionary Policy Economic policies in South Korea will remain expansionary in 2015, said Joo. Plans for this year include speeding up the use of a 46 trillion won (US$42.7 billion) stimulus package that was announced last year, and allocating the record 375.4 trillion won budget.

The government estimates the economy to have grown 3.4 per cent last year, short of an average annual expansion of 3.2 per cent from 2009 to 2013.

Commenting on the recently established won-yuan direct trading market, Joo said the government was looking to create incentives to market makers to boost trade.

This included a review onto cutting the levy on short-term foreign-currency debt at brokerages, which was imposed to slow curb rapid swings in capital movements.

Since Park and Chinese President Xi Jinping agreed in July to establish the direct trading market, South Korea has selected 12 banks as market makers to help build liquidity by providing bid and offer prices for the currency pair.

Joo said the government has plans to make South Korea an offshore yuan hub by encouraging the development of won-yuan forwards from brokerages.

Daily trading volume for the won-yuan market, which started December last year, has averaged 5.4 billion yuan (US$870 million) per day, more than the yen-yuan market in Japan, according to statements from the Bank of Korea and the Finance Ministry.

BLOOMBERG